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21st Century Business Herald reporter Ye Maisui and trainee reporter Lai Zhentao report from Guangzhou

Entering July, the weather is hot, but it is far less enthusiastic than investors for cross-border ETFs. Two newly listed Saudi ETFs have been trading at their daily limit for two consecutive days, with premium rates exceeding 15%, making them the most "expensive" QDII funds in the ETF market.

Due to the excessive premium, Huatai-PineBridge issued an emergency risk warning announcement after the market closed today (July 17). As of today's close, the closing prices of Huatai-PineBridge Saudi ETF (520830) and Southern Saudi ETF (159329) were 1.186 yuan and 1.187 yuan, respectively, with premiums of 15.71% and 15.61%. According to statistics from Tonghuashun, 94 of the 128 cross-border ETFs currently have premiums.

Two Saudi ETFs hit daily limit for two consecutive days

In the past two years, there has been a strong desire for funds to go overseas to seek gold. On Tuesday (July 16), cross-border ETFs were launched. Two ETFs investing in the Saudi market were listed on the A-share market and won "full applause" on the first day. On July 16, Huatai-PineBridge Saudi ETF and Southern Saudi ETF both opened high. In the morning, Southern Saudi ETF once rose by more than 9%, and Huatai-PineBridge Saudi ETF also rose by 7.24%, but fell back by the midday close. However, after the afternoon opening, the two Saudi ETFs continued to rise in volume. At around 1 pm, they hit the daily limit one after another.

As of the close of Tuesday, Huatai-PineBridge Saudi ETF closed at 1.078 yuan, and Southern Saudi ETF closed at 1.079 yuan. Both Saudi ETFs were at a premium. There were signs of hot money operations on that day. Since cross-border ETFs support T+0 intraday trading, that is, securities bought on the same day can be sold on the same day, the turnover rates of the two Saudi ETFs on the first day of listing were very high. As of the close, the turnover rate of Huatai-PineBridge Saudi ETF reached 307.63%, and the turnover rate of Southern Saudi ETF was as high as 399.32%.

After the opening of the market on Wednesday, funds continued to pour in, and there was a slight fluctuation before 10 o'clock, but after 10 o'clock, the two Saudi ETFs both hit the daily limit again. However, compared with Tuesday, the trading volume of the two ETFs today has shrunk significantly, showing a cooling trend. Among them, the full-day trading volume of Huatai-PineBridge Saudi ETF was 1.51 billion yuan, which was 2.058 billion yuan the day before; the trading volume of Southern Saudi ETF was 738 million yuan, which was 2.838 billion the day before.

According to Guohai Securities analyst Li Yang, these two Saudi ETFs are the first in the country and were approved on June 14. The products adopt the Shanghai-Shenzhen-Hong Kong cross-listing investment method. By investing in the Southern China Securities Saudi Arabia ETF, they can closely track the FTSE Saudi Arabia Index, opening the door to the Saudi capital market for domestic investors.

He Li, the manager of Zhiyu Zhishan Fund, analyzed that the Saudi ETF has been rising for two consecutive days, mainly because these two ETFs are scarce and are currently the only channel for investing in Saudi Arabia from the mainland. Buying these two funds is equivalent to buying the Southern East Investment Saudi Arabia ETF of Hong Kong stocks through the QDII channel. From a fundamental perspective, the transformation from an oil economy to a diversified economic structure proposed in Saudi Arabia's "Vision 2030" has attracted investors' attention. Saudi Arabia hopes that by 2030, the proportion of non-oil exports or non-oil GDP will increase to 50%, and the proportion of the private sector in GDP will increase to 60% to 70%. Saudi Arabia's economy will cover more industries and sectors. From a growth perspective, Saudi Arabia is an economy with high growth, high profitability and low leverage risk. Saudi Arabia's GDP has a compound annual growth rate of more than 8%, a good population structure, and more than 60% of the population under 30 years old. At the same time, the current PE of the Saudi Arabia Index is not high for a 10% ROE, which is also a positive factor for investors to be optimistic about its future development space.

Southern Fund said in an interview with 21st Century Business Herald that ETFs provide investors with a convenient way to access markets that may have been difficult to reach before. Chinese investors can now directly invest in the Middle East stock market through Saudi ETFs without facing obstacles such as opening overseas accounts, complying with complex foreign regulations and dealing with currency conversions, which allows ordinary investors to share the dividends of the Middle East's economic growth.

According to public information, both Saudi ETFs track the FTSE Saudi Arabia Index, which covers more than 50 large and medium-sized Saudi listed companies. The market generally believes that the index is equivalent to the Saudi version of the "SSE 300".

As of now, the top five weighted stocks in the FTSE Saudi Arabia Index are Saudi Arabia's largest bank, Bank Rahij (18.44%), Saudi National Bank (8.08%), Saudi Aramco (7.34%), Saudi energy giant Acwa Power (4.51%) and Alinma Bank (4.13%). Among the constituent stocks, the banking sector has the largest weight. As of July 11, the top five weighted industries in the FTSE Saudi Arabia Index are finance (39.85%), raw materials (17.10%), energy (11.79%), communication services (8.72%), and public utilities (7.535).

For a long time, oil has been Saudi Arabia's largest pillar industry, which is fully reflected in the Saudi stock market - the market value of the national oil company Saudi Aramco alone accounts for nearly two-thirds of the Saudi stock market.

However, the "oil content" of the two ETF funds listed on Tuesday is not so obvious. Wang Yi, head of the quantitative investment department of Southern East Investment, said in an interview in June that although Saudi Aramco is the world's largest oil company, most of its shares are held by the Saudi government or its affiliates, the proportion of free float is low, and the volatility of oil prices will also increase the risk of portfolio drawdown.

Wang Yi said that in comparison, Saudi banks have higher security and capital adequacy ratios. Under the Islamic financial system, banks cannot charge or pay interest. Saudi financial institutions can obtain deposits at relatively low prices and provide loans at more competitive interest rates.

Currently, Saudi Arabia has the largest capital market in the Middle East and North Africa. The Saudi Stock Exchange has become one of the top ten capital markets in the world by market value. In 2023, the Saudi Tadawul All-Share Index (TASI) rose by more than 11% throughout the year, more than twice the return of the MSCI benchmark.

More than 70% of cross-border ETFs have premium risks

The popularity of the two Saudi ETFs is just the tip of the iceberg of investors' enthusiasm for cross-border investment. In the past two years, the money-making effect of some overseas markets has been obvious. In the first half of this year, the overall average return of QDII reached 5.33%. Among them, Invesco Great Wall NASDAQ Technology ETF (QDII) led the way with a nearly 60% increase. The ETF premium rate exceeded 20% in June, setting a record high. The China AMC Nikkei 225 ETF (QDII), which was popular at the beginning of the year, has risen nearly 17% this year, and the premium rate exceeded 10% last week. At the beginning of this year, the premium rate of the US 50 ETF once reached an astonishing 46%.

Although fund companies have repeatedly warned of risks, it is still difficult to stop investment enthusiasm. For example, Huatai-PineBridge Fund Management Co., Ltd. announced after the market on the 17th: "Today, the secondary market trading price of Huatai-PineBridge Southern East England Saudi Arabia Exchange Traded Open Index Securities Investment Fund (QDII) (Extended Securities Abbreviation: Saudi Arabia ETF, Trading Code: 520830) under our company is significantly higher than the reference net value of fund shares, showing a large premium. Investors are hereby reminded to pay attention to the premium risk of secondary market trading prices. If investors invest blindly, they may suffer heavy losses."

As for the premium of Nikkei ETF at the beginning of this year, the company issued eight premium risk warnings in a row and even initiated a temporary suspension of trading, but it still failed to stop the influx of funds.

"First, domestic investors are paying more and more attention to global investment layout. Therefore, ETFs that directly invest in U.S. stocks, Japanese stocks, and even German stocks and French stocks through A-shares are very popular among investors. On the other hand, cross-border ETFs can be traded on a T+0 basis, and ETF taxes and commissions are very low. In addition, the lack of an arbitrage mechanism provides room for price differences. The superposition of multiple factors has led to a substantial premium on overseas ETFs. As the premium rate of overseas ETFs continues to rise, investors are advised to respond rationally to the surge in overseas ETFs and not blindly chase the surge." Rong Hao, a wealth manager at Paipai.com, said in an interview with a reporter from 21st Century Business Herald.

In addition to the above factors, the fundamental reason for the excessive premium of ETFs linked to overseas is the foreign exchange restrictions of QDII funds. It is reported that cross-border ETFs need to use foreign exchange quotas to invest in foreign assets. If the fund company's quota is used up, it can only suspend subscription. At this stage, if investors want to buy funds over the counter, they can only wait for the fund company to obtain new quotas or for the net redemption of products to release quotas. This also leads to investors who cannot buy the product in the primary market, and can only "enter the game" through ETFs.

Although the State Administration of Foreign Exchange raised the QDII quota for the first time in October in May this year, the quota is still difficult to meet compared with the investment enthusiasm.

As of July 17, 94 of the 128 cross-border ETFs had premiums, accounting for 73.4%, of which 10 had premiums exceeding 5%. At the same time, more than 30 products have issued more than 400 risk premium warning announcements this year.

Zhang Qing, an analyst at Huabao Securities, believes that historically, the premium rate of ETFs will basically not remain high for a long time. Since 2020, there have been 47 cases in which the premium rate of domestic listed ETFs has exceeded 15%, and the average number of days it has remained above 15% is only 1.7 days. In other words, if it does not exceed 2 days on average, the high premium rate will converge downward. For investors who still want to invest in overseas markets, they can choose ETFs with a premium rate in a reasonable range for allocation, and temporarily avoid varieties with high premium rates.

Due to the influx of funds, many QDIIs have to "close their doors and limit customers". On July 15, Huabao Fund issued an announcement that in order to protect the interests of fund unit holders, Huabao Nasdaq Select Fund will suspend large-scale subscriptions from July 16, 2024 (Tuesday), and the upper limit of the cumulative subscription amount for a single account per day is set at 20,000 yuan. As of the 17th, nearly 200 QDII funds in the market have announced purchase restrictions.